UPDATE 1-Oil Search drops PNG LNG stake sale, to raise equity

* Oil Search ends talks to sell 3.5 pct of PNG LNG project

* To raise equity (Adds details)

SYDNEY, Oct 19 (Reuters) - Australian-listed oil and gas producer Oil Search Ltd (OSH.AX) has scrapped plans to sell a 3.5 percent stake in a Papua New Guinea (PNG) liquefied natural gas (LNG) project, the company said on Monday.

Oil Search halted trading in its shares, pending a full announcement on termination of the deal, and said it would raise equity by selling shares to institutional investors.

Oil Search had been in advanced talks to finalise the sale to Abu Dhabi government-owned International Petroleum Investment Co. Last year, AGL Energy Ltd (AGK.AX) fetched A$800 million ($733 million) by selling its 3.6 percent stake in the project.

Analysts had been expecting Oil Search to achieve a better valuation than the AGL sale, given the significant progress the project had made since then.

Oil Search, which is partnering with ExxonMobil Corp (XOM.N) to build the LNG project in PNG, is realigning its business to focus on the booming LNG sector.

This year, Oil Search also made its first foray into coal-seam gas in Papua New Guinea in the hope of finding more reserves for its LNG business.

Oil Search shares last traded at A$6.75 each, giving it a market value of A$7.7 billion.

(Reporting by Denny Thomas; Editing by Mark Bendeich)